Insurance Fundamentals
for Policymakers
Insurance Fundamentals for Policymakers
Four assignments:
• Insurance Principles
• Insurance Coverages: Property and Casualty
• Insurance Coverages: Life and Health
• Insurance Regulation and Legislation
Insurance Coverages: Property and
Casualty Topics
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The Homeowners Policy
The Personal Auto Policy
The Surplus Lines Market
Reinsurance
Workers Compensation: Statutes and Methods of
Demonstrating Financial Security
The Homeowners Policy
Property and casualty insurance covers real and
personal property and the insured’s liability for
others’ injuries or property damage.
The Homeowners Policy
Section I—Property Coverages
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Dwelling
Other Structures
Personal Property
Loss of Use
Section II—Liability Coverages
 Personal Liability
 Medical Payments to Others
Section I—Property Coverages, Dwellings
and Other Structures
Protects:
• House and structures attached to house
• Detached structures on premises
Perils insured against depend on policy
Section I—Property Coverages, Personal
Property and Loss of Use
• Personal Property—property other than dwelling and
other structures
• Loss of Use—financial losses when an insured
residence is uninhabitable
– Reimbursement for living or meal expenses
– Fair rental value
Section II—Liability Coverages, Personal
Liability
• Bodily injury or property damage for which the insured is
legally liable
• Insurer is obligated to defend the insured
Section II—Liability Coverages, Medical
Payments to Others
• For persons injured at insured’s premises
• Applies whether or not insured is liable
• Claim must be made within three years
Policy Choices—Insureds
• Owner-occupants
• Tenants
• Condominium owners
Policy Choices—Perils
• Perils are causes of loss
• Named perils—Perils listed in the policy
• Open perils—All perils not excluded by the policy
Owner-Occupant Policies
Other Policies
The Personal Auto Policy
An individual or family can use a personal auto
policy (PAP) to insure against the consequences of
losses involving ownership or use of an auto.
Coverage Options
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Liability
Medical payments
Uninsured/underinsured motorists
Physical damage
Personal injury
Liability Coverage
• Covers bodily injury and damage to others’ property
caused by an insured in an auto accident.
• Insured must be found legally responsible.
• Applies to
– Covered vehicles and other vehicles driven by an insured
– Occasional drivers of covered vehicles
Medical Payments Coverage
• Covers reasonable and necessary medical expenses for
injuries from auto accident to
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Insured in any auto
Insured pedestrian injured by auto
Occupants of insured auto
• Paid regardless of fault
• Carries per-person limit
Uninsured Motorists Coverage
Covers bodily injury caused by
 At-fault uninsured motorist
 Hit-and-run driver
 Driver who is insolvent
Underinsured Motorists Coverage
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Added as endorsement to PAP
Covers insured’s injury caused by underinsured at-fault driver
In some states, also covers property damage
Pays difference between underinsured motorists coverage limit and
at-fault vehicle’s liability limits
Physical Damage Coverage
• Applies to insured’s covered autos
• Applies to certain other autos
– Nonowned auto not for insured’s regular use
– Auto or trailer used as temporary substitute (loaner)
• Has a deductible
Physical Damage Coverage—Collision
Applies when covered auto
– Strikes an object
– Collides with another vehicle
– Overturns
Physical Damage Coverage—Other Than
Collision
• Applies to damage not resulting from collision
• Examples: damage from fire, theft, vandalism, hail, animal contact,
flood, and glass breakage
Personal Injury Protection
• Pays benefits regardless of fault
• Covers medical expenses, income loss, and other losses of injured
occupants of covered auto
• May restrict victims’ right to sue (“true” no-fault laws)
• Added by endorsement
The Surplus Lines Market
The surplus market includes unique or unusual exposures, as well as
those exposures that the standard market is unwilling or unable to
insure.
Excess and Surplus Lines (E&S)
Classes of E&S business
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Unusual or unique loss exposures
Nonstandard business
Insureds needing higher coverage limits
Insureds needing unusually broad coverage
 Loss exposures that require new forms of coverage
Unusual or Unique Exposures
• Standard insurance depends on a large number of similar
exposures.
• Without that, coverage is difficult to price.
• E&S coverage may be available.
Nonstandard Business
• Standard insurers may not cover high-loss or uncontrollable-loss
exposures.
• Premiums may be too high.
• E&S coverage may be available.
High Limits, Broad Coverage, New
Exposures
In comparison to what the standard market provides, the E&S market
provides:
– Higher-limit coverages
– Broader coverage
– Coverage for new exposures
E&S Lines Regulation
• Some states maintain lists of approved E&S insurers.
• Other states maintain lists of unapproved E&S insurers.
• Most states require all E&S business to be placed through an E&S
broker.
Reinsurance
Reinsurance enables insurers to meet the needs of the public and
handle their own risk portfolios efficiently. Reinsurance helped the
United States insurance industry withstand such disasters as the
September 11, 2001, terrorist attacks and Hurricane Sandy in 2012.
Basic Reinsurance Concepts
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Insurer transfers liability for certain losses to reinsurer.
In exchange, insurer pays reinsurer a ceding commission.
Insurer retains some of the loss, and coverage is subject to limits.
Reinsurers also use reinsurance (retrocession).
Indemnification of Policyholders
• Policyholders cannot collect directly from reinsurers.
• Two exceptions:
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Cut-through endorsement
Purchase of reinsurance for captive insurer or pool
Workers Compensation
Workers compensation (WC) laws provide an exclusive remedy for
work-related injuries: employers are required to cover such injuries
without regard to fault, and employees’ right to sue in such cases is
limited.
State WC Laws
• Obligate employers to compensate employees for job-related
injuries
• Limit employees’ rights to sue employers for such injuries
• Guarantee prompt payment
• Reduce court burdens and litigation costs
Scope of Coverage
• Medical expenses and wage loss
• Work-related injuries and occupational diseases
Benefits Payable
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Medical benefits
Disability income benefits
Rehabilitation benefits
Death benefits
Persons Covered or Exempt
• Covered—Industrial workers and most workers of private employers
• Exempt (varies by state)
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Small businesses with few employees
Farm labor
Domestic employees
Casual employees
Independent contractors
Employers’ Financial Security
• State laws require employers to demonstrate ability to pay WC
claims.
• Employers can meet this requirement through insurance or selfinsurance.
WC Insurance
• Voluntary market—private insurers
• Assigned risk plan
• State fund
Self-Insurance for WC
• Self-insurance plans
• Self-insured groups
Summary
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Homeowners policies—property damage, loss of use, liability
Personal Auto Policy—losses from ownership/use of autos
Surplus lines—unusual or unique exposures
Reinsurance—insurance for insurers
WC—medical expenses and wage loss